Tariffs likely to impart a modest stagflationary hit to the economy this year

The economic policies of the Trump administration are starting to take shape. President Trump has already announced the imposition of tariffs on some of America's trading partners, and we assume there will be more levies, which will be matched by foreign retaliation, in the coming quarters.

Tariffs impart a modest stagflationary shock to an economy. The U.S. economy entered 2025 with a fair amount of momentum, but we look for real GDP growth to downshift a bit over the next few quarters as the price-boosting effects of tariffs erode growth in real income, thereby weighing on growth in real consumer spending.

We forecast that the economy will accelerate somewhat in 2026 as the looser regulatory environment that the Trump administration is likely to put in place should be conducive to stronger growth in business fixed investment spending. We also assume that Congress will legislate tax cuts later this year that should provide a lift to growth in real disposable income and real consumer spending.

The FOMC cut rates by 100 bps between September and December 2024, but it refrained from easing further at its most recent meeting in January due to "solid" growth in economic activity and an inflation rate that "remains somewhat elevated."

We believe the FOMC will remain on hold for the next few months, but we look for it to ease again later this year as tariffs cause economic growth to downshift and the unemployment rate to tick up. We forecast the Committee will cut rates by 25 bps at each of its policy meetings in September and December before keeping its target range for the federal funds rate unchanged at 3.75%-4.00% throughout 2026.

All economic forecasts are subject to ongoing revisions, but the clouded outlook for U.S. trade policy imparts a higher-than-normal amount of uncertainty into our forecasts. We believe the assumptions about trade policy that we have incorporated into our outlook are reasonable, but we acknowledge our forecasts could be altered considerably in coming months if trade policy turns out to be meaningfully different from what we currently assume.

Download The Full US Economic Outlook